Candidates such as Elizabeth Warren and Bernie Sanders supposedly are competing for hard-left voters, while candidates such as Joe Biden and Pete Buttigieg are going after moderate voters. But a review of Buttigieg’s fiscal policy suggests he may belong in the first category.

In the interview, I focused on Buttigieg’s plan to subsidize colleges. Hopefully, I got across my main point is that students won’t be helped.

Mr. Buttigieg has risen steadily in the Real Clear Politics polling average to a solid fourth place, with about 7% support. …on Friday he released what he called “An Economic Agenda for American Families.” For a candidate who wants to occupy the moderate lane, Mr. Buttigieg’s policy details veer notably left. …$700 billion—presumably over 10 years, but the plan doesn’t specifically say—for “universal, high-quality, and full-day early learning.” …$500 billion “to make college affordable.” That means free tuition at public universities… $430 billion for “affordable housing.” …$400 billion to top off the Earned Income Tax Credit… A $15 national minimum wage.

At the risk of understatement, that’s not a moderate platform.

This isn’t an economic agenda, and there isn’t a pro-growth item anywhere. It’s a social-welfare spending and union wish list. …Don’t forget the billions more he has allocated to green energy, as well as his $1.5 trillion health-care public option, “Medicare for All Who Want It.” So far Mayor Pete’s agenda totals $5.7 trillion… Mayor Pete’s policy wish list is shorter and cheaper than Elizabeth Warren’s, but it still includes gigantic tax increases to finance a huge expansion of the welfare and entitlement state. Call it Warren lite.

Methinks John Stossel needs to update this video. With $5.7 trillion of new outlays, Buttigieg is definitely trying to win the big-spender contest.

By the way, Buttigieg is also a hypocrite. He’s joined with other Democratic candidates in embracing a carbon tax on lower-income and middle-class voters, yet the Chicago Tribunereports that he zips around the country on private jets.

Pete Buttigieg has spent roughly $300,000 on private jet travel this year, more than any other Democrat running for the White House, according to an analysis of campaign finance data. …his reliance on charter flights contrasts sharply with his image as a Rust Belt mayor who embodies frugality and Midwestern modesty. …Buttigieg’s campaign says the distance between its South Bend headquarters and major airports sometimes makes private jet travel necessary. “We are careful with how we spend our money, and we fly commercial as often as possible,” Buttigieg spokesman Chris Meagher said Wednesday. “We only fly noncommercial when the schedule dictates.”

But let’s set that aside and focus on Senator Warren’s radical proposal.

Because the idea would be such a nightmare of complexity, I joked in the interview that the Senator must own shares in firms that do tax accounting.

That’s not a novel observation on my part. Earlier this year, the Wall Street Journalopined why this was a bad idea. Not just a bad idea, a ridiculously foolish idea.

Under current law, long-term capital gains are taxed at rates up to 20%—plus a 3.8% ObamaCare surcharge on investment income—only after the asset is sold. Mr. Wyden calls this a loophole. …Mr. Wyden…proposes an annual “mark to market” scheme… As an asset rises in value, its owners would pay tax each year on the incremental gain. This would create an enormous new accounting burden. Mr. Wyden may say that his mark-to-market rule will apply only to the top 1% or 0.1%, but it would still be a bonanza for tax attorneys. How will people in the top 2% know whether they’ve passed the threshold, and how far will they go to avoid it? …Mr. Wyden’s plan would tax gains that exist merely on paper. …And what about illiquid investments, such as private companies or real estate? As with Ms. Warren’s suggested wealth tax, no one knows how Mr. Wyden would go about valuing them. …Would the owner of an apartment building be asked to revalue it every year? Will an art investor be told to mark that Picasso to market? Good luck.

It’s not just absurdly complex. It’s also bad tax policy, as the WSJ noted.

…there are good reasons to tax capital gains at preferential rates, which is why the U.S. has done it for decades under Democrats and Republicans. The lower rate…reduces the harm from double taxation after corporations already pay income taxes. …A lower tax rate is also a matter of fairness. If investors have capital losses, they aren’t allowed to deduct more than $3,000 a year. There’s no inflation adjustment either: If $100 of stock bought in 1999 is sold for $150 today, the difference is taxed even though much of it is an illusory gain caused by dollar erosion.

The final sentence should be emphasized.

Under the Wyden – now Warren – plan, you can have illusory gains that only reflect inflation, and then you can get taxed on those illusory gains even if you don’t actually get them because you haven’t sold the asset.

David Bahnsen, writing for National Review, says the idea is simply nutty.

Senator Ron Wyden of Oregon is the top-ranking member of the Senate’s tax committee... And his recent policy proposal to tax unrealized capital gains is just as extreme, silly, impractical, dangerous, and inane as any of the aforementioned policy whiffs floating around in the leftist hemisphere. …The problems here are almost as severe as the problems with getting a wind-powered ride across the Pacific Ocean in the Green New Deal. First and foremost, the compliance costs would be the biggest boondoggle our nation’s financial system has ever seen. How in the world is illiquid real estate that has not sold supposed to be “valued” each and every year, let alone illiquid businesses, private debt, venture capital, and the wide array of capital assets that make up our nation’s economy but do not fit in the cozy box of “mutual funds”? …Another problem exists for this delusional plan: How do smaller investors pay the tax on an investment that has not yet returned the cash to them? …Underlying all of the mess of this silly proposal from Senator Wyden is the Democrats’ continued lack of understanding about what is most needed in our economy — business investment. The war on capital is a war on jobs, on productivity, on growth, and on wages. Taking bold actions to disincentivize productivity, investment, risk-taking, and capital formation is akin to discouraging diet and exercise for someone trying to lose weight.

The Tax Foundation summarizes many of the key issues in capital gains taxation.

…viewed in the context of the entire tax system, there is a tax bias against income like capital gains. This is because taxes on saving and investment, like the capital gains tax, represent an additional layer of tax on capital income after the corporate income tax and the individual income tax. Under a neutral tax system, each dollar of income would only be taxed once. …Capital gains face multiple layers of tax, and in addition, gains are not adjusted for inflation. This means that investors can be taxed on capital gains that accrue due to price-level increases rather than real gains. …there are repercussions across the entire economy. Capital gains taxes can be especially harmful for entrepreneurs, and because they reduce the return to saving, they encourage immediate consumption over saving.

Here’s a chart depicting how this double taxation creates a bias against business investment.

Here are some excerpts from a column in the Wall Street Journal on the topic of capital gains taxation.

The authors focus on Laffer-Curve effects and argue that higher tax rates can backfire. I’m sympathetic to that argument, but I’m far more concerned about the negative impact of higher rates on economic performance and competitiveness.

…there is a relatively simple and painless way to maintain the federal coffers: Restore long-term capital-gains tax rates to the levels in place before President Obama took office. A reduction in this tax could generate significant additional revenue. …This particular levy is unique in that most of the time the taxpayer decides when to “realize” his capital gain and, consequently, when the government gets its revenue. If the capital-gains tax is too high, investors tend to hold on to assets to avoid being taxed. As a result, no revenue flows to the Treasury. If the tax is low enough, investors have an incentive to sell assets and realize capital gains. Both the investors and the government benefit. …The chance to test that theory came in May 2003, when Congress lowered the top rate on long-term capital gains to 15% from 20%. According to the Congressional Budget Office, by 2005-06 realizations of capital gains had more than doubled—up 151%—from the levels for 2002-03. Capital-gains tax receipts in 2005-06, at an average of $98 billion a year, were up 81% from 2002-03. Tax receipts reached a new peak of $127 billion in 2007 with the maximum rate still at 15%. By comparison, federal capital-gains tax receipts were a mere $7.9 billion in 1977 (the equivalent of about $31 billion in 2017 dollars), according to the Treasury Department. The effective maximum federal capital-gains tax was then 49%. …Using our post-2003 experience as a guide, we can predict a dramatic improvement in realizations and tax receipts if the top capital-gains tax rate is lowered to 15%. …but that’s not the only benefit. Such changes also increase the mobility of capital by inducing investors to realize gains. This allows investment money to flow more freely, particularly to new and young companies that are so important for growth and job creation.

Here’s another chart from the Tax Foundation showing that revenues are very sensitive to the tax rate.

Last but not least, Chris Edwards explains that the U.S. definitely over-taxes capital gains compared to other developed nations.

Democrats are proposing to raise capital gains taxes. …Almost every major Democratic presidential candidate supports taxing capital gains as ordinary income. …These are radical and misguided ideas. …capital gains taxes should be low or even zero. …the United States already has high tax rates compared to other countries. The U.S. federal-state rate on individual long-term gains of 28 percent compared at the time to an average across 34 OECD countries of just 16 percent. …the combined federal-state capital gains tax rates on investments in corporations…includes the corporate-level income tax and the tax on individual long-term gains. …Numerous countries in the OECD study do not tax individual long-term capital gains at all, including Belgium, Chile, Costa Rica, Czech Republic, Hungary, Luxembourg, New Zealand, Singapore, Slovenia, Switzerland, Turkey. The individual capital gains tax rate on long-term investments in those countries is zero. …Raising the federal corporate and individual capital gains tax rates would be a lose-lose-lose proposition of harming businesses and start-ups, undermining worker opportunities, and likely reducing government revenues.

I wrote two days ago about how the White House is contemplating ideas to boost the economy.

This is somewhat worrisome since “stimulus” plans oftentimes are based on Keynesian economics, which has a terrible track record. But there are policies that could help growth and I comment on some of them in this interview.

The discussion jumped from one idea to the next, so let’s makes sense of the various proposals by ranking them from best to worst.

And I’m including a few ideas that are part of the discussion in Washington, but weren’t mentioned in the interview.

Index Capital Gains – The moral argument for using regulatory authority to index capital gains for inflation is just as strong as the economic argument, as far as I’m concerned. Potential legal challenges could create uncertainly and thus mute the beneficial impact.

Lower Payroll Tax Rates – While it’s always a good idea to lower the marginal tax rate on work, politicians are only considering a temporary reduction, which would greatly reduce any potential benefits.

Do Nothing – As of today, based on Trump’s statements, this may be the most likely option. And since “doing something” in Washington often means more power for government, there’s a strong argument for “doing nothing.”

Easy Money from the Fed – Trump is browbeating the Federal Reserve in hopes that the central bank will use its powers to artificially reduce interest rates. The president apparently thinks Keynesian monetary policy will goose the economy. In reality, intervention by the Fed usually is the cause of economic instability.

In my ideal world, I would have included spending cuts. But I limited myself to ideas that with a greater-than-zero chance of getting implemented.

I’ll close with some observations on the state of the economy.

Economists have a terrible track record of predicting twists and turns in the economy. This is why I don’t make predictions and instead focus on analyzing how various policies will affect potential long-run growth.

That being said, it’s generally safe to assume that downturns are caused by bad economic policy, especially the Federal Reserve’s boom-bust monetary policy.

Like this:

One of the worst features of the internal revenue code is the pervasive bias against income that is saved and invested.

People who immediately consume their after-tax income are largely untaxed (thankfully, we don’t have a value-added tax), but there are several additional layers of tax on people who set aside income to finance future economic growth.

Interestingly, some progress may be possible. According to a Bloomberg report, the Trump Administration may be on the verge of getting rid of the hidden inflation tax on capital gains.

The White House is developing a plan to cut taxes by indexing capital gains to inflation, according to people familiar with the matter, in a move that…may be done in a way that bypasses Congress. Consensus is growing among White House officials to advance the proposal soon, the people said, to ensure the benefit takes effect before President Donald Trump faces re-election in 2020. Revamping capital gains taxes through a rule or executive order likely would face legal challenges, a concern that reportedly prompted former President George H.W. Bush’s administration to drop a similar plan. …Indexing capital gains would slash tax bills for investors when selling assets such as stock or real estate by adjusting the original purchase price so no tax is paid on appreciation tied to inflation. …The inflation adjustment would amount to a several percentage point tax cut for investors, depending on the type of asset and how long it’s held, according to 2018 estimates from the non-partisan Congressional Research Service. Corporate stock with dividends held for 10 years would be currently be subject to an effective tax rate of 24.3%. That same holding indexed to inflation would be subject to a 21.4% tax rate, CRS said.

Kimberley Strassel of the Wall Street Journalopines that this would be a very desirable reform.

What if President Trump had the authority—on his own—to enact a second powerful tax reform? He does. The momentum is building for him to use it. …forces are aligning behind a plan: a White House order to index capital gains for inflation. It’s a long-overdue move—one that would further unleash the economy and boost GOP election prospects. …At President Reagan’s behest, Congress in the 1980s indexed much of the federal tax code for inflation. Oddly, capital gains weren’t similarly treated. The result is that businesses and individuals pay taxes on the full nominal amount they earn on investments, even though inflation eats up a good chunk of any gain. It’s not unheard of for taxes to exceed real gains after inflation. …the Internal Revenue Code does not require that the “cost” of an asset be measured only as its original price—meaning there is no reason Treasury could not construe it in today’s dollars. …The move would set off an explosion of buying and selling—of which the government would get its cut. The lower tax on capital would also help asset prices grow. All of this would be excellent news for the economy.

So what would happen if the rumors are true and Trump unilaterally eliminates the tax on inflationary gains?

The Tax Foundation estimated how such a change would affect the economy and the budget. The report includes a helpful example of how this reform would protect investors.

…if an individual purchased an asset for $100 in January 1, 2000 and sold that asset for $200 on July 1, 2018, the nominal capital gain would be $100. However, inflation over that period increased the price level by 49 percent. Under an indexing proposal, the individual would be able to gross up the basis of $100 by the total inflation during that period to $149. As a result, the individual would only be taxed on $51 instead of the full $100.

Here’s a table comparing the status quo with indexing.

Here’s the estimate of the economic benefits.

…indexing capital gains to inflation would increase the long-run size of the economy by 0.11 percent, which is equivalent to about $22 billion in 2018. This provision would primarily boost output by reducing the service price of capital, which would increase the incentive to invest in the United States. We estimate that the service price of capital would be 0.15 percent lower under this proposal. The capital stock would be 0.26 percent larger and the larger capital stock would boost labor productivity leading to 0.08 percent higher wages.

And here’s the accompanying table.

The Tax Foundation also prepared an estimate of the impact on tax revenue.

On a dynamic basis, the revenue loss would be…$148.3 billion over the next ten years. The increase in output due to the lower cost of capital would boost incomes, which would boost payroll revenue and slightly offset individual income tax revenue losses.

The bottom line is that this is not a self-financing reform (that only happens in rare instances), but it is a reform that would help the economy by encouraging more jobs and growth.

Let’s close with a video from an unlikely supporter of inflation indexing.

Notwithstanding these remarks, I don’t think Schumer will applaud if Trump indexes the capital gains tax. Instead, I suspect he’s now more likely to support measures that would exacerbate this form of double taxation. Though I think he’s still on the right side (at least behind the scenes) on the issue of “carried interest,” so maybe he’s not a totally lost cause.

The Wall Street Journalreports on a misguided new idea from Ron Wyden, the ranking Democrat on the Senate Finance Committee.

The top Democrat on the Senate’s tax-writing committee proposed taxing unrealized gains in investment assets every year at the same rates as other income…an idea that would transform how the U.S. taxes the wealthiest people. …Under Mr. Wyden’s concept, capital gains would be taxed annually based on how much assets have gained in value. Now, by contrast, gains are taxed only when assets are sold and at a top rate of 23.8% instead of 37% for ordinary income.

Second, levying such a tax would be a logistical nightmare. Here’s another brief excerpt from the article.

Mr. Wyden’s concept would present logistical challenges. He would need to figure out how to value complex assets, handle declines in value, deal with people without enough cash to pay the tax and address illiquid investments such as closely held businesses and real estate.

So why would Sen. Wyden propose such a clunky class-warfare scheme?

Because it would generate (at least on paper) a lot of money that could be used to buy votes.

This mark-to-market tax concept…could raise substantial money. A similar proposal…would generate an estimated $125 billion in 2025 alone… Democrats, who are campaigning on wide-ranging and costly ideas for more spending on health care, infrastructure and education, can point to plans by Mr. Wyden and others to explain how they would pay for policy proposals.

Of course, no amount of tax increases would generate the revenue to finance the so-called Green New Deal.

Democrats have frequently found unfairness in the different ways that the U.S. tax system approaches wage and investment income. They have focused their response, in part, on the “Buffett Rule”, inspired by Warren Buffett’s claim that he pays a lower tax rate than his secretary.

I added this final excerpt simply so I can point out that Buffett’s claim is utter nonsense.

And so is the “Buffett rule” that some folks on the left have proposed.

My contribution was a chapter about the impact of taxation, especially the capital gains tax.

At a panel in Washington, I had a chance to discuss my findings.

If you don’t want to watch an 11-minute video, my presentation can be boiled down to four main points.

1. Demographics is destiny – Other authors actually had the responsibility of explaining in the book about the importance of demographic change. But it never hurts to remind people that this is a profound and baked-in-the-cake ticking time bomb.

So I shared this chart with the audience and emphasized that a modest-sized welfare state may have been feasible in the past, but will be far more burdensome in the future for the simple reason that the ratio of taxpayers to tax-consumers is dramatically changing.

And it goes without saying that big-sized welfare states are doomed to collapse. Think Greece and extend it to Italy, France, Japan, and other developed nations (including, I fear, the United States).

2. Entrepreneurship drives growth – Capital and labor are the two factors of production, but entrepreneurs are akin to the chefs who figure out news ways of mixing those ingredients.

For all intents and purposes, entrepreneurs produce the creative destruction that is a prerequisite for growth.

3. The tax code discourages entrepreneurship – The bulk of my presentation was dedicated to explaining that double taxation is both pervasive and harmful.

I shared my flowchart showing how the American tax code is biased against income that is saved and invest, which discourages entrepreneurial activity.

And then showed the capital gains tax burden in developed countries.

The U.S. is probably even worse than shown in the above chart since our capital gains tax is imposed on inflationary gains.

4. The United States need to be more competitive – Last but not least, I pointed out that America’s class-warfare tax policies are the fiscal equivalent of an “own goal” (soccer reference for World Cup fans).

And this chart from my chapter shows how the United States, as of mid-2016, had the highest combined tax rate on capital gains when including the effect of the capital gains tax.

That’s the bad news. The good news is that the Trump tax cuts did produce a lower corporate rate. So in the version below, I’ve added my back-of-the-envelope calculation of where the U.S. now ranks.